(Bloomberg) — At a July 2011 dinner for Citigroup Inc. clients, a research analyst identified a stock to bet against. In his last research notes before that gathering, he upgraded the shares, advising investors to stick with them.
The analyst, who wasnt identified Monday in a Financial Industry Regulatory Authority action, was among several cited by Wall Streets self-funded regulator in its decision to fine Citigroup $15 million. The employee offered similar tips at six subsequent idea dinners on stocks that he had rated as hold or neutral, according toFinra.
The incident is among several examplesFinracited, alleging Citigroup failed to supervise research analysts and prevent them from sharing material, non-public information. Its reminiscent of industry-leading fines the bank paid in 2003 to settle claims analysts published misleading stock research to win investment-banking business. The firm has paid at least $33 million over relevant violations since,Finrasaid.
The egregious conflicts of interest that went on during the Internet-bubble period are much less common today, but some of the underlying economic incentives havent changed, Jay Ritter, a finance professor at the University of Florida in Gainesville, said in a phone interview. When sell-side analysts at say, Citigroup, push it too far, there have to be penalties. Otherwise, the envelope will continue to be pushed.
Selective Dissemination
Finrafined New York-based Citigroup over its failure to adequately protect against potential selective dissemination of non-public research from January 2005 to February 2014, the regulator said in a statement.
The bank issued about 100 warnings regarding analyst communications with clients and sales and trading staff,Finrasaid. When violations were found, the firm took too long to discipline employees or didnt do enough,Finrasaid.
Citigroup encouraged analysts to communicate with clients to foster relationships and bring in commissions, and pay policies that considered client reviews may have enticed analysts to share non-public information,Finrasaid. Citigroup failed to adequately police those interactions,Finrasaid.
We are pleased to have resolved and put this matter behind us, Sophia Stewart, a Citigroup spokeswoman, said in an e-mail. Citi takes its regulatory compliance obligations seriously, and we believe that we have strong procedures and controls in place to address the issues thatFinrahas raised.
Improper Access
Over three years starting in October 2010, about three dozen Citigroup analysts participated in more than 40 idea dinners attended by clients and sales and trading staff,Finrasaid. The events sometimes featured contests where attendees would identify stocks to buy and others they expected to underperform. Some picks were tracked, with awards given to those who fared best. In some cases, analysts offered advice that differed from their published research,Finrasaid.
Citigroup did not enforce the boundaries of permissible communications to ensure that its analysts did not provide certain clients with improper access to non-public research information, Cameron Funkhouser, executive vice president of Finras Office of Fraud Detection and Market Intelligence, said in the statement.
In 2003, Citigroup was among firms that promised to prohibit research analysts from helping to woo investment- banking clients. The company separated investment banking from its research and retail brokerage units in October of the previous year and hired Sallie Krawcheck, the former chief executive officer of Sanford Bernstein & Co., to lead a business that had more than 300 analysts globally at the time.
Amp Up
Under the terms of that settlement, then-Chairman Sandy Weill and investment bankers agreed to be barred from communicating directly with analysts. Weill had previously told analyst Jack Grubman to take a fresh look at AT&T Corp. at a time when Citigroup was seeking investment-banking assignments from the telecommunications company, according to then-New York Attorney General Eliot Spitzer, who initiated the investigations into conflicts in the securities industry.
From 2011 to 2013, Citigroup didnt stop analysts from helping clients prepare for so-called road shows, done to attract investors before initial public offerings,Finrasaid. In one case, an analyst e-mailed a company to suggest that it amp up discussions of some topics, the regulator said.
At least seven banks, including Citigroup, JPMorgan Chase & Co. and Goldman Sachs Group Inc., may be asked to pay a total of $50 million in fines as part of an agreement withFinra, people with knowledge of the matter said earlier this month, following claims analysts inflated estimates to win business for their firms. Bank of America Corp., Credit Suisse Group AG, Deutsche Bank AG and Wells Fargo & Co. also may face fines, the people said. Michelle Ong, aFinraspokeswoman, declined to say whether todays action is linked to that matter.
Citigroup consented to Finras findings without admitting or denying the charges, according to the regulators statement.
